6. Preferred Stock, Common Stock and Stockholders’ Equity

Preferred Stock

Under the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 5,000,000 shares of preferred stock with a $0.0001 par value. No shares of preferred stock were outstanding as of December 31, 2014 or 2013.

Initial Public Offering

In September 2013, the Company completed the IPO whereby it issued and sold 2,100,000 shares of common stock at a public offering price of $12.00 per share. Concurrently with the completion of the IPO, all outstanding shares of convertible preferred stock were converted into 2,439,002 shares of the Company’s common stock. In addition, warrants to purchase 84,000 shares of the Company’s common stock were issued to the representative of the underwriters of the Company’s IPO and certain of its affiliates. The warrants became exercisable at a price of $21.00 per share beginning on September 24, 2014 and will expire on September 24, 2018. Finally, warrants to purchase 110,000 shares of convertible preferred stock were converted into warrants to purchase 22,000 shares of the Company’s common stock and upon this conversion became classified as equity. In October 2013, the underwriters for the IPO exercised an option to purchase 315,000 additional shares of the Company’s common stock at $12.00 per share. Total net proceeds from the IPO, after deducting underwriter discounts, commissions and other offering expenses of $3.9 million, were $25.1 million.

Common Stock

As of December 31, 2014, there were 6,112,091 shares of common stock outstanding. Each share of common stock is entitled to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors of the Company. To date, no dividends have been declared.

On November 13, 2014, the Company entered into an At Market Sales Agreement (“Sales Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $6.6 million of shares of common stock through MLV, as sales agent. The sales of shares of the Company’s common stock made through this equity program are made in “at-the-market” offerings as defined in Rule 415 of the Securities Act. As of December 31, 2014, the Company had not issued any shares of its common stock pursuant to the Sales Agreement. In January 2015, the Company sold 25,000 shares of common stock at a weighted average price per share of $6.74 pursuant to the Sales Agreement and received net proceeds of approximately $163,000, net of commissions and fees. The Company intends to use the net proceeds to continue to fund its ongoing Phase 3 clinical trial and for general corporate purposes. The Company currently has the capacity to issue up to approximately $6.4 million of additional shares of common stock pursuant to the Sales Agreement.

Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of the Company’s common stock and the Company’s capital needs. Although sales of the Company’s common stock have taken place pursuant to the Sales Agreement, there can be no assurance that MLV will be successful in consummating future sales based on prevailing market conditions or in the quantities or at the prices that the Company deems appropriate. Under current SEC regulations, at any time during which the aggregate market value of the Company’s common stock held by non-affiliates, or public float, is less than $75.0 million, the amount the Company can raise through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under the Sales Agreement, is limited to an aggregate of one-third of the Company’s public float. As of November 11, 2014, the Company’s public float was 2.9 million shares, the value of which was $20.0 million based upon the closing price of the Company’s common stock of $6.86 on such date. The value of one-third of the Company’s public float calculated on the same basis was $6.6 million.

In addition, the Company will not be able to make future sales of common stock pursuant to the Sales Agreement unless certain conditions are met, which include the accuracy of representations and warranties made to MLV under the Sales Agreement. Furthermore, MLV is permitted to terminate the Sales Agreement in its sole discretion upon ten days’ notice, or at any time in certain circumstances, including the occurrence of an event that would be reasonably likely to have a material adverse effect on the Company’s assets, business, operations, earnings, properties, condition (financial or otherwise), prospects, stockholders’ equity or results of operations. The Company has no obligation to sell the remaining shares available for sale pursuant to the Sales Agreement.

Warrants

The Company has issued warrants to purchase common stock to banks that have loaned funds to the Company, as well as to representatives of the underwriters of the Company’s initial public offering and certain of its affiliates. A summary of the Company’s warrant activity is as follows:

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			Price		Term (Years)
Outstanding at December 31, 2013		106,000		$	18.20		5.13
Issued		22,881		$	5.90		10.00
Exercised		(10,000	)	$	7.50		3.10
Expired/Forfeited	—			—		—
Outstanding at December 31, 2014		118,881		$	16.73		5.35

Stock Options

The Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) in May 2007 under which 450,000 shares of common stock were reserved for issuance to employees, nonemployee directors and consultants of the Company. As of December 31, 2014, no options were available for future grant under this plan.

In August 2013, the Company adopted the 2013 Equity Incentive Award Plan (the “2013 Plan”) as a successor to the 2007 Plan. Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then employees, officers, non-employee directors or consultants of the Company. A total of 510,000 shares of common stock were initially reserved for issuance under the 2013 Plan. In addition, the number of shares of common stock available for issuance under the 2013 Plan will be annually increased on the first day of each fiscal year during the term of the 2013 Plan, beginning with the 2014 fiscal year, by an amount equal to the least of: (i) 300,000 shares; (ii) four percent of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) such other amount as the Company’s board of directors may determine. As a result of such calculation, the Company increased the number shares reserved for issuance under the 2013 Plan by 243,870 shares. As of December 31, 2014, 188,370 options remain available for future grant under the 2013 Plan. On January 1, 2015, the Company further increased the number of shares reserved for issuance under the 2013 Plan by 244,484 shares, making 432,854 options available for future grant under the 2013 Plan.

Options granted under the 2007 Plan and 2013 Plan have ten year terms from the date of grant and generally vest over a one to four year period. The Company granted options to purchase 64,000 and 501,500 shares of common stock in 2014 and 2013, respectively. The exercise price of all options granted during the years ended December 31, 2014 and 2013 was equal to the market value per share of the Company’s common stock on the date of grant.

A summary of the Company’s stock option activity under the 2007 Plan and 2013 Plan is as follows:

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual		Aggregate
	Shares			Price		Term (Years)		Intrinsic Value
Outstanding at December 31, 2013		624,750		$	7.61		8.41	$	869,490
Granted		64,000		$	7.65		9.35	—
Exercised		(5,250	)	$	0.29		2.70	$	33,810
Expired/Forfeited	—			—		—		—
Outstanding at December 31, 2014		683,500		$	7.67		8.45	$	649,000
Vested and expected to vest at December 31, 2014		683,500		$	7.67		8.45	$	649,000
Exercisable at December 31, 2014⁽¹⁾		259,081		$	5.47		7.65	$	631,231

(1)	Includes awards with early exercise provisions that permit optionee to exercise unvested options.

Except for the stock options exercised, the intrinsic values above represent the aggregate value of the total pre-tax intrinsic value based upon a common stock price of $5.90 and $7.45 at December 31, 2014 and 2013, respectively, and the contractual exercise prices. The intrinsic value for the stock option exercise is based upon a common stock price of $6.73 on the date of exercise.

The 2007 Plan permits the early exercise of options, but the Company has the option to repurchase any unvested shares at the original purchase price (the exercise price paid by the purchaser) upon any voluntary or involuntary termination (“Repurchase Option”). The shares of common stock issued from the exercise of stock options are restricted and vest over time or on the achievement of certain milestones. Any unvested shares immediately vest in the event of termination for reasons other than cause, and vesting accelerates in the event of a merger, sale, or other change in control of the Company. Of the total 332,000 stock options exercised, 287,000 and 230,500 were vested as of December 31, 2014 and 2013, respectively.

The total intrinsic value of stock options exercised was $33,810 and $0 for the years ended December 31, 2014 and 2013, respectively. There was one option exercised in 2014 and no options exercised during 2013.

The Company had the following nonvested options under the 2007 Plan and 2013 Plan:

	Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested at December 31, 2013		534,210		$	8.84
Granted		64,000		$	4.76
Vested		(173,791	)	$	7.96
Expired/Forfeited	—			—
Nonvested at December 31, 2014		424,419		$	9.02

Stock-Based Compensation

Stock-based compensation expense includes charges related to stock option grants and employee stock purchases under the Company’s Employee Stock Purchase Plan (the “ESPP”). The Company measures stock-based compensation expense based on the grant-date fair value of any awards granted to its employees. Such expense is recognized over the period of time that employees provide service and earn rights to the awards.

The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for options grants during the two years ended December 31, 2014:

The weighted average grant date fair value per share of employee stock options granted during the years ended December 31, 2014 and 2013, was $4.76 and $6.33, respectively.

	Year Ended December 31,
	2014		2013
Risk free interest rate	1.66% - 1.77%		1.75% - 1.8%
Expected option term	5.5 - 6.0 years		6.0 years
Expected volatility of common stock	71.06% - 73.21%		70.8% - 79.4%
Expected dividend yield		0.00%		0.00%

Employee Stock Purchase Plan

On June 13, 2013, the Company’s board of directors adopted the ESPP, and the Company’s stockholders approved the ESPP on August 29, 2013. The ESPP became effective on the day prior to the effectiveness of the IPO. The ESPP permits participants to purchase the Company’s common stock at 85% of the fair market value through payroll deductions of up to 20% of their eligible compensation. A total of 30,000 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP is annually increased on the first day of each fiscal year during the term of the ESPP by an amount equal to the lesser of: (i) 30,000 shares; (ii) one percent of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) such other amount as the Company’s board of directors may determine. As a result, the Company increased the number shares reserved for issuance under the ESPP by 30,000 shares on January 1, 2014. During 2014, 7,294 shares of common stock were issued under the ESPP. As of December 31, 2014, 52,706 shares remain available for future issuance under the ESPP. On January 1, 2015, the Company further increased the number of shares reserved for future issuance under the ESPP by 30,000 shares, making 82,706 shares available for future issuance under the ESPP after that increase.

The estimated fair value of the shares to be acquired under the ESPP was determined on the initiation date of each six month purchase period using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for ESPP shares to be purchased during the year ended December 31, 2014:

	Year Ended December 31,
	2014		2013
Risk free interest rate	0.05% - 0.08%			—
Expected term	6.0 months			—
Expected volatility of common stock	69.32% - 73.21%			—
Expected dividend yield		0.00%		—

The Company recognized non-cash stock-based compensation expense to employees and directors in its research and development and its general and administrative functions as follows:

	Year Ended December 31,
	2014		2013
Research and development	$	410,150	$	39,638
General and administrative		691,937		106,328
Total stock-based compensation expense	$	1,102,087	$	145,966

As of December 31, 2014, there was approximately $2,323,000 of unrecognized compensation costs related to outstanding employee and board of director options, which is expected to be recognized over a weighted average period of 1.32 years.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following at December 31, 2014 and 2013:

	December 31,
	2014		2013
Stock options issued and outstanding		683,500		624,750
Authorized for future option grants		188,370		8,500
Warrants to purchase common stock		118,881		106,000
Authorized for employee stock purchase plan		52,706		30,000
Total common stock reserved for future issuance		1,043,457		769,250